Hong Kong, September 5 (Reuters) – Country Garden has cleared debt payments due on two of the US bonds just before the end of the grace period on Tuesday. A person close to the company was noted saying that this debt payment comes as a relief to the property developer and the crisis-stricken Chinese property sector.
Country Garden, China’s largest private property developer had earlier failed to pay the debt payments on the bonds worth $22.5 million, which were due by August 6. It led to a fear about the cash situation of the developer and kept the markets on the edge throughout their 30-day grace period.
Although the amount was rather inconsiderable, failure to pay debt payments within the grace period would have meant that China’s steady drip feed stimulus policy was struggling to stabilize the fragile economy. It would have also shattered the hopes of the financial markets.
It would also have escalated the situation of default, leading to increased demands by other bond holders to expedite the debt payments.
As reported by Reuters, Country Garden initially didn’t respond to the request for comment. The person close to the company had declined to be identified as they are not allowed to engage with the media.
The Markets Reaction
The markets reacted to these debt payments by booking their profits, as the Country Garden’s share price dropped by nearly 3% on Tuesday morning. Moreover, the property indexes like China’s CSI 300 Real Estate Index (.CSI000952) and the Hang Seng Mainland Properties Index (.HSMPI), also saw a dip of 2% as some investors booked their profits from the previous day.
A dull post-pandemic recovery has made matters even worse. As per a private sector survey released on Tuesday, the services activity in China expanded at its slowest pace in eight months in August. This had been followed by a continuous slow economic demand and failure on the Chinese government’s part to revive the economy.
Today’s development comes amid Country Garden winning the approval of extending a private bond totaling 3.9 billion yuan ($536 million) from the onshore lenders on Friday.
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The Overview
Country Garden had honored all debt payment obligations; until it failed to pay the interest on two dollar bonds in August after facing a slow demand in the property sector and a tense cash flow situation.
In addition to this, Country Garden has $162 million of offshore debt payments that are due throughout this year, as shown by Creditsight.
The Country Garden’s situation shows the plight of China’s real estate sector, which accounts roughly a quarter of the economy and is in a mess currently after the government took action against high leverage in 2021.
To ease the crisis-like situation and boost the economic demand, China has introduced a stimulus lately that included reducing existing mortgage rates and preferential loan disbursement to first-time homeowners in big cities.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, U.K.said that, “With a weak domestic demand and declining house prices in smaller Chinese cities in particular, there are still concerns about the vulnerability of the real estate sector,”
In this perspective the stimulus package is a welcome move to increase mortgage lending, but a much larger support is required to restore the confidence in the real estate sector, and put the troubled property developers in a comfortable situation.
($1 = 7.2117 Chinese yuan renminbi)
($1 = 7.8088 Hong Kong dollars)
